The bypass valves are so you do not have to fill the water heater with RV antifreeze when you winterize. All that does is move the valves so the antifreeze goes through a line between the water heater inlet and outlet, instead of through the water heater. The water heater should be drained for winterizing, with no antifreeze in it.
To use the water heater, you should turn the bypass valves so that the cold water goes into the water heater, fills it, and goes out the water heater. DO NOT turn on the water heater until you are sure it is full of water.